Archive for the ‘Tax Fraud’ Category

It Was the Sisterly Thing To Do

Sunday, March 1st, 2015

Three Wisconsin sisters allegedly decided that tax fraud and identity theft should stay in the family. They’ve been accused of filing 2,000 phony returns by the Wisconsin Department of Revenue.

The Staten sisters (Sharon, Tawanda, and Angela) face 22, 28, and 40 felony charges respectively. It appears the investigation began when Angela and an alleged accomplice, Anthony Coleman, were arrested at a traffic stop in East Troy, Wisconsin. The police found a fake income tax return along with other related evidence and forwarded that information to the Department of Revenue.

As to the scheme itself, it appears to be identity theft on a fairly large scale. With the help of accomplices, the sisters used the names of prison inmates to allegedly file the phony returns. While the DOR did stop many of the returns from being processed, the sisters allegedly took the department for $234,390. It’s a certainty that if the Wisconsin allegations are true that they took the IRS for more than that. The returns appeared to have been filed mainly with TurboTax.

At least one of the sisters is in prison with bail being set at $10,000. It’s quite probable that if that traffic stop hadn’t happened the sisters (if the allegations are true) would still be trying to fleece Wisconsin and the IRS.

“Ripping Off Your Refunds” In the Miami Herald

Sunday, February 22nd, 2015

There is an excellent article in the Miami Herald on the identity theft tax fraud crisis. The epicenter of this is South Florida (as noted in the article). I don’t have much to add to the frustrations of victims with the IRS’s conduct in these cases. One quote:

“The IRS call center person acted as if we were the ones who had done something wrong.”

Solely a Way to Go to ClubFed

Sunday, February 22nd, 2015

Until I became a tax professional I had never heard of a “Corporation Sole.” It’s a legal entity consisting of a single incorporated office, occupied by a single person. It’s a corporate structure used mainly for religions organizations so that office holders can have a successor for their office.

When used for a religious organization, a corporation sole doesn’t pay taxes. It has nothing to do with the corporation sole and everything to do with the fact that a church is a charitable (501(c)(3)) organization that generally doesn’t pay tax. Used properly, a corporation sole is a useful vehicle for churches.

Of course, where you and I wouldn’t go the bozo tax element quickly moves. Even though the IRS has warned about corporation soles since 2004, promoters still tried to sell the snake oil to the gullible. One such entity was Trioid International Group Inc. Trioid, here in nearby Henderson, currently markets itself as a company specializing in being a Nevada registered agent and will help individuals set up a Nevada corporation. That seems like a good, legal business (and it likely is).

However, a visit to the Internet wayback machine gives a very different picture of Trioid. Trioid was actively marketing corporation soles in 2005, and had this description of them:

Common law corporation soles are excluded from filing tax returns of any kind under a mandatory exception in the Internal Revenue Code pursuant United States Code, Title 26 §508(c)(1)(A) and there are no record keeping requirements which may be imposed by any taxing or revenue authority. Corporation soles are not required to make any application for this exclusion or exception and are not required to qualify under §501 (c)(3) as a “church”. In other words, the sole exists due to your natural right to freedom of belief and as such, there is no law respecting its establishment or operation which may impair it, including taxation. To tax the overseer is to tax the sole. The tax Code exception provides the corporation sole with the status of “nontaxpayer” in contradistinction to “taxpayer”. The federal courts have ruled that Congress makes no tax laws that apply to nontaxpayers!

The above paragraph is basically out-and-out tax fraud.

Helpfully to prosecutors, the names of the two individuals behind Trioid were in plain view on the web pages: Gerrit Timmerman and Carol Sing. They were indicted back in 2013 and were convicted on Friday of conspiracy to defraud the United States related to their promotion of a tax fraud scheme. They’ll likely get some time at ClubFed to think about what they did.

As always, the usual warning applies: If it sounds too good to be true, it probably is. If you use a corporation sole as a vehicle to avoid taxes, you’re heading down a road that leads to ClubFed.

Old Fashioned Theft Leads to New Fashioned Identity Theft

Thursday, January 22nd, 2015

A case out of my old home town of Visalia, California lets us know that sometimes there’s just not much you can do to prevent yourself from being a victim of identity theft. Back in 2011 Rebekah Root either stole documents from an IRS office in Visalia or she obtained them. (The original announcement from the DOJ doesn’t make it clear which is the case.) She then proceeded to commit identity theft using those documents.

TIGTA (the Treasury Inspector General for Tax Administration) investigated the theft, and when they found out that the paperwork was used to file returns on those individuals IRS Criminal Investigation joined in finding the culprit. Ms. Root pleaded guilty last year to wire fraud, making a false claim for a tax refund, and aggravated identity theft. She received 45 months at ClubFed for the $50,000 in fraudulent tax refunds she had claimed.

Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy

Friday, January 16th, 2015

This is for the don’t do this at home file for tax professionals. Kenneth Harycki is the former mayor of Stillwater, Minnesota. He’s also a licensed CPA in Minnesota (but probably not for much longer). Mr. Harycki will provide an interesting lesson the next time I teach ethics.

Mr. Harycki provided accounting, tax, payroll, and bookkeeping services to clients. Back in 2007, he provided services to Model Health Care. From the Department of Justice press release:

Within the first few payroll cycles for Model Health Care (Model), a company controlled by the two separately charged co-conspirators, the defendant concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government. The defendant learned that these co-conspirators had directed that the withheld taxes not be paid to the government and, instead, the taxes would be used for other purposes, including compensating the co-conspirators and their family members and funding other businesses operated by the co-conspirators.

Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll taxes and not paying them to the IRS. Would you:
(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Choice (c) is not one that most of us would consider. It is, though, the one that Mr. Harycki not only considered but did:

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

Given that the tax loss is between $1 million and $2.5 million, Mr. Harycki will be heading to ClubFed.

There’s not much to add to the press release. If I discover a defalcation while preparing a return, it’s my responsibility to tell the client. And if my client tells me he’s going to continue the actions, I’m required to quit the engagement. I’ve had to do this once in my career; if I discovered such a fraud I’d make the easy decision to get out the engagement. Apparently Mr. Harycki’s ethics were a bit different than most CPAs and EAs. My. Harycki has received a nomination for the 2015 Tax Offender of the Year, though.

FTC Sponsors Tax Identity Theft Awareness Week

Saturday, January 10th, 2015

Coincidentally (see the previous post), yesterday I received an email from Lisa Lake, Director of Consumer & Business Education of the Federal Trade Commission (FTC). She was highlighting the FTC’s Tax Identity Theft Awareness Week. Happily, this is not a how-to for individuals looking to commit identity theft; rather, it’s a campaign to raise awareness of how consumers can protect themselves from tax ID theft and IRS imposter scams.

Here’s what Ms. Lake wrote:

I thought Taxable Talk readers would like to know about Tax Identity Theft Awareness Week, an initiative led by the Federal Trade Commission taking place January 26-30, 2015.

Identity theft is the largest complaint category at the FTC and, within that category; tax identity theft has emerged as the largest subcategory. IRS imposter scams and similar ruses are a new twist targeting taxpayers. As of August 2014, Treasury Inspector General for Tax Administration (TIGTA) had received over 210,000 complaints with victims losing about $11 million to these scams. The Federal Trade Commission (FTC)’s Sentinel data also shows a significant spike with tens of thousands of these complaints in 2014.

IRS imposter schemes typically work like this:

• Someone calls or emails pretending to be from the IRS
• Scammers rig caller ID to make it look like IRS is calling (may have DC 202 area code)
• Scammers may know the last 4 digits of your SSN
• They may use fake IRS badge #s
• They ask people to wire money or put it on a money card
• Scammers may threaten arrest, deportation or loss of driver’s license
• Sometimes they make a follow-up call pretending to be from DMV or police, also rigging caller id

Your newspaper can help raise awareness about how consumers can protect themselves from tax ID theft and IRS imposter scams. The Federal Trade Commission’s (FTC) Tax Identity Theft Week website (ftc.gov/taxidtheft) provides your readers with tools to do that. We also want to let consumers know how to file a complaint with the FTC; we hope you share the complaint link www.ftc.gov/complaint and the toll-free number 1-877-FTC-HELP with your readers, as well.

Also, there will be a free webinar hosted by the FTC on during Tax Identity Theft on January 27, 2015, at 2pm EST. Consumers can visit ftc.gov/taxidtheft to register and get more information.

I’m all for anything that will put a bite into identity theft. Hopefully this will make a difference.

Tax Fraud on the Wholesale

Saturday, January 10th, 2015

Out of New York City comes allegations of wholesale tax fraud. Seven individuals were arrested on Thursday and charged with conspiracy to defraud the US, conspiracy to commit wire fraud, and aggravated identity theft. Some of the defendants were charged with subscribing to a false tax return. The allegations show a scheme that took inside information and allowed widespread tax fraud. Here’s how it supposedly worked.

One of the defendants worked for the New York City Human Resources Administration as a fraud investigator. He allegedly sold names, dates of birth, and social security numbers to the other members of the conspiracy. They allegedly used their tax practice in the Bronx to prepare thousands of returns with the Earned Income Tax Credit using the stolen identities. This gave individuals a higher refund…and allowed the conspirators to allegedly pocket some of the proceeds. The scheme supposedly ran from at least 2009 to 2014. The conspirators were quite brazen; they allegedly continued with their conspiracy even after search warrants were executed on their business. (Hint: That was not a good idea.)

The scheme intertwined two areas of tax fraud: The Earned Income Credit and identity theft. Both have been repeated topics on this blog.

If found guilty the defendants are looking at terms at ClubFed.

Would the Proprietors of “I Married an Idiot” Commit Tax Fraud?

Thursday, November 20th, 2014

Sometimes you can’t make this stuff up.

Perhaps you missed the website imarriedanidiot.com. The website is down, but thanks to the Internet Archive it will continue to be accessible. I’ll leave it to the reader to peruse the web site.

I saw a brief story on Mark Garcia and Patricia McQuarry in the Pioneer Press. It seems that they not only thought they married an idiot, they committed an idiotic form of tax fraud.

The couple, who are married and were the proprietors of the aforementioned web site, decided to claim to have received “…hundreds of thousands of dollars in 1099-OID income and that the entire amount had been withheld and paid over to the IRS on their behalf.” The couple even put down real bank tax identification numbers on their phony paperwork. Unfortunately, the IRS didn’t detect the fraud until after the fact. Yet it was certain that sooner or later the IRS would find the fraud given that the IRS document matching system wouldn’t match their phony paperwork to real 1099s.

One good fraud deserves another, so the couple then bought real estate and transferred it into a trust titled “POKE-A-BOTTOM.” (No, I didn’t make that up.) Then they were facing foreclosure, so they sent fake tax returns and frivolous documents to their bank. (In all seriousness, lying on a loan document can be a federal felony.) “The documents included fake tax forms and a “Bonded Promissory Note” for $10,000,000, along with instructions that the financial institution should use the document to pay off their $266,000 mortgage and keep the remaining funds.” Somehow the bank decided that wasn’t a good idea. I imagine that the RV and gold coins purchased by the couple with some of the proceeds will be used to pay back the United States Treasury.

The couple will have plenty of time to think of non-idiotic behaviors they can do in the future. There wasn’t anything idiotic about their sentencing for one count each of Conspiracy to Defraud the United States and two counts each of False Claims Against the United States: Mark Garcia received 30 months at ClubFed; his wife, Patricia McQuarry, received 40 months.

From Owning a Party Mansion to Partying at ClubFed

Sunday, September 14th, 2014

Claude Verbal II wasn’t the most well liked owner of a home in North Raleigh, North Carolina. It seems that the 15,000 square foot mansion wasn’t used as a home; rather, it was a place to PARTY! To be fair, the parties appear to have been operated by Mr. Verbal’s ex-wife, Pamela Verbal. The local HOA probably has nothing to worry about as far as any additional parties. Besides an injunction issued by a local court, Mr. Verbal will need to sell the mansion (if it hasn’t already been sold).

You see, Mr. Verbal pleaded guilty earlier this year to a $6,460,962 tax and health care fraud scheme. He was sentenced last week to 135 months (11 years and 3 months) at ClubFed along with full restitution for one count of conspiracy to defraud the United States, one count of aiding and assisting the preparation of false tax returns, one count of healthcare fraud, and one count of money laundering.

In the tax fraud scheme, Mr. Verbal owned a tax preparation franchise with ten locations in North Carolina. Mr. Verbal and his employees offered customers a unique bonus system: If the return was falsified and the client paid cash, he would get a much larger refund. Mr. Verbal and his employees utilized familiar methods: fake dependents and phony credits. Mr. Verbal bought stolen identities so his scheme could continue.

It’s how the scheme was uncovered that makes this quite interesting. From the DOJ press release:

In November 2010, one of Verbal’s employees informed a U.S. probation officer of the fraudulent practices at NBT’s location on Fayetteville Street. The probation officer informed Verbal of this fraud and he falsely denied knowledge of it. Afterward, Verbal took steps to keep the profitable Fayetteville Street location open and to continue operating as usual, but to also further distance himself from the fraudulent practices. In order to do this, Verbal transferred the electronic filing privileges for that NBT branch to a nominee. Verbal and others jointly persuaded a relative of Verbal who allowed Verbal to use their name to apply for new electronic filing privileges for the Fayetteville Street location. In exchange, Verbal and his wife paid the relative $10,000, and the relative had no role in operating NBT, no professional tax experience and no knowledge of the fraud that was occurring at NBT.

But that’s not all. Besides owning a tax preparation firm, Mr. Verbal owned a Medicaid health provider in North Carolina. Mr. Verbal engaged in healthcare fraud, including changing diagnosis codes, inflating the number of clients treated, billing for services not rendered, and faking assessments.

From both schemes, Mr. Verbal used the proceeds to buy luxury goods and possessions, such as his party house in North Raleigh. Many of the items acquired by Mr. Verbal were seized during the investigation, including nearly $766,000 in cash and a 7-carat diamond ring.

As a reminder to anyone who is offered the chance to get a larger refund by paying in cash and having phony items added to his or her tax return: Don’t do it! If it sounds too good to be true it probably is. Not only is knowingly participating in such activities a crime, sooner or later you could get a “Dear Soon to be Audited Taxpayer” letter from the IRS.

It Never Works, But They Keep Doing It

Sunday, September 14th, 2014

“It amazes me that people who withhold payroll taxes and don’t remit them to the IRS can get away with it.” That’s what my friend, Scott Harker, EA, said to me this morning. Yet time and again I read stories where someone decides to abscond with payroll taxes meant for the IRS. It only works until you get caught, and you’re almost always caught.

Take William Danielczyk, Jr., of Oakton, Virginia. If that name rings a bell, it’s because you remember that Mr. Danielczyk was previously sent to ClubFed for two years for illegally funneling just under $200,000 to Hillary Clinton’s political campaigns back in 2006 and 2008. (Mrs. Clinton had no knowledge of the illegal campaign contributions.) When he was sentenced he remarked, “I’ve always tried to lead by example, and I obviously didn’t do that here.”

It turns out that the campaign finance crimes were small in dollars in comparison to his payroll tax crimes. From mid-2009 through 2011, Mr. Danielczyk didn’t send $2,232,781 to the IRS from employee tax withholdings. He also didn’t send employees’ contributions to 401(k) retirement plans to the custodians; that loss was $186,263. Even after he was indicted for the campaign finance law violations he continued with this scheme! That’s chutzpah.

At least the money went to some good purchases. From the Department of Justice press release:

According to court records, instead of paying Innovative’s employment taxes and pension plan contributions, Danielczyk made a variety of purchases from company accounts. Those purchases included $505,871 for the use of an executive suite in the FedEx Field football stadium in Landover, Maryland, along with $40,000 to sponsor the Virginia Gold Cup, a series of Steeple Chase horse races held in northern Virginia.

Mr. Danielczyk was sentenced to eighteen months at ClubFed, three years of supervised release, and must make restitution of $1.6 million to the IRS.

A hint to anyone who wants to try robbing from payroll withholding: Don’t do it! The IRS investigates 100% of these violations. And it’s a certainty that such malefactions will be discovered–sooner or later (likely sooner) someone will be claiming the withheld payroll tax and the IRS won’t match it (as you took it).

If you’re an employer, this is a reminder that you should use EFTPS to verify that your payroll tax withholding has made it to the IRS. If you use employee leasing (aka PEOs), you have to find another method to verify the withholdings but you should do so. Paying payroll tax once is bad enough; paying it twice is really bad.